EIU Global Forecasting Service

Proxy conflicts in the Middle East develop to cripple global energy markets

Low probability, Very high impact; Risk intensity =

January 24th 2018Introduction

The rivalry between Saudi Arabia and Iran has been a multi-decade issue. However, it is currently intensifying and there is a small but notable risk of outright conflict in the coming years as the wider region becomes more polarised between the two sides.

Analysis

Historically, Saudi Arabia's geopolitical actions in the region have been cautious and reactive, relying typically on the US for security back-up. However, in the light of the perceived rising threat of an expansionary Iran, combined with a much more assertive younger generation of policymakers led by the 32-year-old crown prince, Mohammed bin Salman al Saud, this trend is being reversed. The crown prince has been leading a Saudi military intervention in Yemen since early 2015, and joined a boycott of a Gulf neighbour, Qatar, since June - both of which were partly an attempt to crack down on Iranian influence. Adding to the aggressive approach taken by Saudi Arabia is a more divisive and unclear US policy in the Middle East. The decision of the previous US president, Barack Obama (2009‑17), to draw back US direct influence in the region and engage in diplomacy with Iran - eventually leading to the 2015 agreement of the nuclear deal - played a part in Saudi Arabia deciding to take a more active role in opposing Iran. With the current US president, Mr Trump, ramping up incendiary rhetoric and expanding unilateral sanctions on Iran, the US is now inflaming tensions in the region. Indeed, Mr Trump's recent comments, supportive of protestors in Iran, saw the Iranian regime react angrily to what it claims is foreign interference in its own affairs. Furthermore, the decision by Saudi Arabia and its allies to boycott Qatar in mid-2017 came shortly after a visit by Mr Trump to Saudi Arabia, in which it seems likely that he gave his support for such a move. However, far from putting pressure on Iran and isolating Qatar, the boycott has pushed the two states closer together, with Turkey also in the orbit of this alliance, given its miltary presence in Qatar. This, in turn, is fostering the development of a Saudi-Egypt-UAE axis, highlighting how the Saudi-Iran rivalry is creating and solidifying divisions within the region, as countries are increasingly forced to pick sides. It means that any country with possibly conflicting interests in the rivalry will probably suffer from a destabilising proxy conflict in the medium term, either through indirect military action or through the funding of competing political groups.

Conclusion

In the worst-case scenario, these proxy battles could lead to wider conflict in the Gulf region, potentially pitting Saudi Arabia and Iran directly against each other, shutting down the Strait of Hormuz and crippling global energy markets. In a period when we already expect global oil stockpiles to be falling, any disruption to supply from the Gulf would quickly translate into a surge in prices and would consequently hit global economic growth prospects severely.